Tuesday 5 February 2013

To market, to market...

Looking at a chart of the Australian Stock Market (ASX200) performance over the past ten years, it struck me how similar it looks to my net worth performance over the same period. Comparing them side-by-side (below) shows exactly how closely my net worth has tracked the Australian stock market.

While I have a sizeable investment in stocks, my total investment in the stock market (both directly via individual stock holdings and mutual or index funds, and via our SMSF investments) is only about the same value as our investment in Sydney real estate. So it was a bit of a surprise to see such a high correlation between my net worth and the local stock market. As a rule-of-thumb my net worth appears to go up or down by $200 for every 1-point movement in the ASX200.

I suspect the explanation is that the value of my real estate investments has been following a gentle up-trend (with the occasional mild dip of 5-10%), which has only been sufficient to offset the drop in value of my overseas stock investments in $A terms caused by the rise in the value of the Aussie dollar during this period, and the exaggeration of the market decline I experienced due to increasing my gearing levels during 2007 (which I failed to hedge when my index put-options expired in Dec 2007).

The chart also suggests that, despite saving about 1/3 of my gross salary income (mostly via superannuation 'salary sacrifice'), my future wealth is largely dependent on the vagaries of the stock market.

The recent bullish behaviour of the local stock market might indicate that there is some prospect that the ASX200 could regain the heady levels of late 2007 sooner than most pundits predict. Given that the Australian economy is more closely linked to the booming Asian region that either the US or Eurozone economies, and we are supposedly still in a 'golden age' of high commodity prices, the adverse impact of the high $A on Australian manufacturers may have run its course.

When I recall the pessimism about the stock market just after the 1987 'crash', the long-term (100+ year) chart of stock market trends suggests that early 2009 and 2012 may turn out to have been 'buying opportunities' similar to the dips of 1931, 43, 63, 74, 81, 91, and 96.

The long-term view also shows that although the Australian stock market was expensive in 2007 (which explains why the Australian market hasn't got back to 2007 levels yet, while the Dow Jones has), it was nothing like the 'bubble' of 1987.

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